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Loss aversion and sunk cost sensitivity in all-pay auctions for charity: Theory and experiments

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  • Foster, Joshua

Abstract

This paper theoretically and experimentally studies the role of two behavioral biases in all-pay auctions for charity. The theory is developed to predict the effect of loss aversion in the first-price all-pay auction and sunk cost sensitivity in the war of attrition. Using controlled laboratory experiments, auction treatments are designed to test for the presence of these biases. In support of the theory, the results indicate that revenues in incremental bidding mechanisms such as the war of attrition rely on bidders who are sunk cost sensitive. It is shown that this behavioral response can be curbed significantly with a commitment device. Likewise, the results of the experimental first-price all-pay auctions find evidence of loss aversion, which reduces bidders’ average bid. These findings help explain the inconsistencies in revenues from previous all-pay auction studies and indicate a mechanism preference based on the distribution of these behavioral characteristics.

Suggested Citation

  • Foster, Joshua, 2020. "Loss aversion and sunk cost sensitivity in all-pay auctions for charity: Theory and experiments," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    • Handle: RePEc:eee:soceco:v:84:y:2020:i:c:s2214804319301831
    DOI: 10.1016/j.socec.2019.101486
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    Cited by:

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    3. Kim, Huong Trang & Nguyen, Quang, 2022. "Managers’ loss aversion and firm debt financing: Some insights from Vietnamese SMEs," Finance Research Letters, Elsevier, vol. 44(C).
    4. Huong Trang Kim, 2023. "Linking Trait Affectivity, Cognitive Ability, and Preferences Among Top Managers: Insights From a Lab-In-The-Field Experiment," Evaluation Review, , vol. 47(3), pages 479-503, June.

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    More about this item

    Keywords

    Auctions; Market design; Charitable giving;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers

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